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TMI Blog2020 (2) TMI 833X X X X Extracts X X X X X X X X Extracts X X X X ..... after called "the Tribunal") read as under:- "The grounds of appeal listed below are without prejudice to each other. 1. The order of the learned Principal Commissioner of Income-tax - 6, Chennai ['PCIT'] is erroneous, bad in law, prejudicial to the Appellant and contrary to the facts and circumstances of the case. Issue 1: On jurisdiction to set aside the assessment order under section 263 of the Incometax Act, 1961 ('the Act') 2. The learned PCIT has erred in exercising powers under section 263 of the Act and has failed to appreciate that the order under section 143(3) of the Act passed by the Assessing Officer ('AO') did not pass the twin conditions of being 'erroneous' and 'prejudicial to interest of the revenue', 3. The learned PCIT has erred in holding that the AO has not applied his mind on the subject issue merely because the AO has not discussed the same in the Assessment order. 4. The learned PCIT has failed to appreciate that AO has adopted one of the possible views of the matter and the jurisdiction under section 263 of the Act cannot be exercised merely to substitute the view taken by the AO. 5. The order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly allowed by the AO . Thus, the learned PCIT had aforesaid reasons to believe that assessment order passed by the AO was erroneous so far as prejudicial to the interest of the Revenue warranting interference u/s 263 of the 1961 Act, by observing as under in SCN dated 14.03.2019 issued by learned PCIT: " ....On examination of the assessment record for AY 2013-14, it has been observed by me as under:- (i) It is seen from the P & L A/c Sch-22 other expenses, you have claimed Rs. 1,40,45,352/- towards provision for warranty, it is seen from the Sch-8, under movement of warranty provision, it is shown as follows: Op. Bal - Rs. 2,43,88,044/- Add: Provision created - Rs. 1,40,45,352/- Less: Utilised / reversed - Rs. 99,37,415/- Closing balance - Rs. 2,84,95,981/- It is noticed from the details furnished that you have sought to justify the claim of provision based on the subsequent figures. Since, warranty provision are to allowed only on the past figures of claim against provision made, the provision towards warranty created of Rs. 1,40,45,352/-as expenditure for FY 2012-13 is based on the figures subsequent FY 2013- 14. Hence the claim of provision towards warranty wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or similar contracts), the probability that an outflow will be required in settlement is determined by considering the said obligations as a whole. 3.2 This contention is corroborated from the fact that the assessee company has made reversal entry also from the provision and the utilization is not made to the full extent of provision, but there is a big gap between the provision made and the utilization. This shows that the obligation and outflow of the source was not correctly estimated and this should be allowed on actual basis only. 3.3 Further, as explained above for a liability to qualify for recognition, there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. The above mentioned facts were not considered and discussed while allowing the provision for warranty by the Assessing Officer. 3.4 Hence, it would appear that the assessee had made an incorrect claim and the same has been debited in the P&L Account. In the circumstances, the AO should have disallowed the claim. However, the AO has failed to do so in the assessment order. Therefore, in conclusion, the assessing officer has not made complete verificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, provisions were made as per Schedule 8 of the audited financial statements of the assessee company. Our attention was also drawn by learned counsel for the assessee to notice dated 17.10.2016 issued by AO during the course of assessment proceedings u/s 142(1) by the AO which is separately filed before the Bench by learned counsel for the assessee and attention is drawn to point number 5 wherein there is specific query made by the AO as to justify provision for warranty of Rs. 1,40,45,352/- claimed as an expenditure by the assessee. Statement is made before the Bench by learned counsel for the assessee that reply was filed by assessee on 24.10.2016 before AO during assessment proceedings conducted by AO, along with explanation for provision for warranty as to how it was computed and the aforesaid reply dated 24.10.2016 claimed to be filed before AO along with computation of warranty provision is placed in file. The said contention of having filed details of provision for warranty is also reiterated by assessee in written submissions filed by learned counsel for the assessee and the aforesaid reply dated 24.10.2016 is also filed along with written submissions filed by assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order and learned PCIT was justified in invoking revisionary provisions under Sec.263 of the Act. It was submitted by Ld. CIT-DR that decision in the case of Malabar Industrial Company Limited v. CIT reported in (2000) 109 Taxman 66(SC) was rendered by Hon'ble Supreme Court prior to amendment in Section 263 of the 1961 Act , wherein now Explanation-2 is inserted in Section 263 of the 1961 Act by Finance Act, 2015 w.e.f. 01.06.2015 and deeming fiction is created by Explanation 2 to Section 263 which is inserted by Finance Act, 2015 . The learned CIT-DR relied upon decision in the case of Toyoto Motor Corporation v.CIT reported in (2008)173 taxman 458(SC) and decision of Hon'ble High Court of Gauhati in CIT v. Jawahar Bhattacharjee reported in (2012) 24 taxmann.com 215(Gau. HC) and it was submitted that there was no application of mind by the AO while passing assessment order and hence the same is erroneous in so far as prejudicial to the interest of Revenue. The Ld.AR submitted in rejoinder that learned PCIT cannot substitute its opinion with the opinion formed by the AO while passing assessment order, unless it is shown that assessment order is erroneous in so far as is pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed ay, vide assessment order dated 27.02.2017 passed by AO and no additions were made by the AO to the income of the assessee while framing aforesaid scrutiny assessment. The learned PCIT has held assessment order dated 27.02.2017 passed by the AO to be erroneous in so far as prejudicial to the interest of Revenue , vide revisionary order dated 30.03.2019 passed by learned PCIT u/s 263 of the 1961 Act, by holding that there is a big gap between the provision made for warranties and its utilization thereof , and secondly that the assessee has itself reversed the excess provision made towards warranties as the utilization was not made to the full extent of provisions and further holding that the AO has not made proper enquiries and verification before allowing claim for provisions for warranty. Before proceeding further, it will be profitable at this stage to analyze the background and financials of the assessee for the current financial year as well for preceding financial years. The audited financials statements from financial year 2007-08 to 2012-13 are placed by assessee in paper book filed with tribunal . The assessee is engaged in business of manufacturing of auto parts and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in paper book at page number 49 to 53 and on perusal of said assessment order, it is observed that no addition has been made by AO towards claim for provision for warranties made by the assessee for ay: 2012-13. Similarly, scrutiny assessment for ay: 2011-12 was also farmed by the AO under provisions of Section 143(3) vide assessment order dated 16.02.2015 passed by AO and no additions to the income of the assessee was made by the AO towards claim for provision for warranties while framing scrutiny assessment for ay: 2011-12. As per details placed on record, the assessee made provision for warranties to the tune of Rs. 85.28 lacs for ay: 2011- 12 on Gross Turnover of Rs. 558.40 crores, which translates it to 0.15% of gross turnover. Thus, as could be seen the AO allowed claim for provisions for warranties for ay: 2011-12 and 2012-13 in scrutiny assessment framed under provisions of the 1961 Act and no additions to income was made by the AO towards claim for provisions for warranties claimed as deduction while computing income chargeable to tax for ay: 2011-12 and 2012-13 also. It is not shown by Revenue before the Bench that assessment orders passed by the AO for ay: 2011-12 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end as well as management estimates of further liability to be incurred in this regard during the warranty period, computed on the basis of technical evaluation and past trend of such claims." On careful perusal of the aforesaid note, it is observed that the assessee is following a method for computing provision for warranties based on the claims received upto year end as well management estimate of further liability to be incurred in this regard during the warranty period , computed on the basis of technical evaluation and past trends of such claim. In our considered view, it could not be said that such method for making provision for warranties is in the realm of perversity and rather in our considered view the method adopted is fair and reasonable method to compute provision for warranties , as it considered actual claims received upto year end as also management estimate based on technical evaluation and past trends. While making provisions for warranties , the tax-payer has to make present estimate of likely obligation which may arise in future arising out of existing contracts of sale and services made by assessee entailing outgo in future on account of commitments made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 25,77,68,31,117 2 Closing balance of provision for warranty to be retained, based on past experience of actual warranty expense (B) (Working provided below in Table B) 0.1% 3 Closing balance of provision for warranty for FY 2012-13 -(C=A*B) 2,84,95,981 4 Opening balance of provision for warranty for FY 2012-13 2,43,88,044 5 Actual warranty expense incurred during FY 2012-13 99,37,415 6 Provision for warranty to be created during the FY 2012-13 1,40,45,352 Table B: Workings for computing percentage of warranty expense in proportion to the turnover. Year Turnover (Rs.) Warranty Claims (Rs.) Claim % on Sales considered for warranty purposes 2007-08 2,98,75,94,875 - 0.0% 2008-09 4,24,19,80,814 - 0.0% 2009-10 4,84,88,60,032 19,15,893 0.0% 2010-11 5,03,95,36,000 85,28,070 0.2% 2011-12 6,11,23,89,566 1,86,54,652 0.3% Total 23,23,03,61,287 2,90,98,615 0.1% Copy of financial statement for the FY referred above is enclosed. The issue of claim of provisions for warranties was a recurring issue which is arising every year and it is brought on record by assessee that the AO did framed scrutiny asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties in the year under consideration to reduce its tax liability or to defraud Revenue or the claim so made was unconscionably higher. Under these circumstances, we are of the considered view, the AO has formed an conscious opinion while allowing deduction towards claim of provision for warranties while framing scrutiny assessment for impugned ay and it could not be said that the AO formed an opinion which could be termed as perverse to the extent that the assessment order passed by the AO could be termed as erroneous in so far as prejudicial to the interest of the Revenue warranting interference u/s 263 of the 1961 Act. The powers u/s 263 are extra-ordinary revisionary powers vested with learned PCIT who is required to pass an revisionary order after examining the 'record' as stipulated in sub-section 1 to Section 263 of the 1961 Act read with Explanation 1 clause (b), which explanation provide that the 'record' shall include and shall be deemed always to have included all records relating to any proceedings under the 1961 Act available at the time of examination by learned PCIT or CIT. The word 'record' is defined under Explanation 1(b) to Section 263 in an most exhaustive manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessments for ay: 2010-11 to 2012-13 and provision for warranties made during the year under consideration is not unconscionably higher than that of preceding years warranting interference u/s 263 of the 1961 Act rather it has fallen to 0.18% of Gross Turnover during the year under consideration from 0.36% of Gross Turnover during immediately preceding year. It is now well settled by catena of judgments that in tax proceedings , principles of res-judicata is not applicable but principles of consistency has to be maintained to instill certainty in tax matters in the minds of tax-payer so that they can plan their affairs , unless perversity is shown in the action of tax-payer in claiming deduction while computing income chargeable to tax or it is shown that an attempt is made by tax-payer to defraud revenue or an unconscionably high claim of deduction is made by the tax-payer which breaches all cannon of equity, justice and law. We donot find any such attempt made by assessee in the instant case to defraud Revenue while making claim for provisions for warranties in the year under consideration rather we find the method adopted for making claim for provision for warranties as fair ..... X X X X Extracts X X X X X X X X Extracts X X X X
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